Pros and Cons of NFTs: Everything You Need to Know

Disclaimer: The text below is an advertorial article that was not written by Cryptonews.com journalists.

Introduction

According to DappRadar, NFT sales touched the mark of USD 25 billion in 2021, although many people are still unsure what NFTs are. But the enthusiasm is real; just look at Beeple's spectacular 'Ocean Front,' which sold for an incredible USD 6 million.

Whether you're a digital artist, trader, or simply interested in the 'buzz,' this article will explain to you about NFTs, their pros & cons, and how to buy NFTs.

So without wasting much time, Let’s get started!

What Are NFTs

NFT stands for "Non-Fungible Token," and it serves two purposes: The term "non-fungible" refers to the fact that it is the sole uncopiable version of the asset. Consider each NFT asset to have its own digital footprint, with the uniqueness of each project having its own value. Following that, we'll look at the "token" side, which refers to the NFT asset's proof of ownership.

When you purchase an NFT, you receive a token or proof of ownership, which is stored on the blockchain and can be easily verified by anybody doing a search. When it comes time to sell that NFT or employ its real-world advantages, having a legitimate NFT rather than a snapshot is quite valuable.

NFTs are unique digital art assets, collectibles, website domains, event tickets, real estate, and even tweets that are sold to investors on the blockchain. They can be any sort of digital art such as music, movies, graphics, memes, or a combination of media.

Let's look at some of the Pros and Cons of NFTs to better comprehend them.

Pros of NFTs

1. NFTs help to improve market efficiency.

NFTs' ability to improve market efficiency is its most evident advantage. Converting a physical product to a digital asset has the potential to improve supply chains, reduce intermediaries, and increase security.

A superb example is now being played out in several segments of the art world. Thanks to NFTs, artists can now engage directly with their audiences, eliminating the need for expensive agents and time-consuming transactions. Furthermore, digitizing artwork enhances the verification process, simplifies transactions, and reduces costs.

NFTs, on the other hand, have uses that go beyond the marketplace. For example, they may,  eventually grow as a useful tool for individuals and corporations to manage and govern sensitive data and records.

Consider our usage of passports, which must be produced at every entry and exit point. By converting them into independent NFTs, we can simplify the process of managing travel and identifying people. The savings in terms of both time and money is enormous.

2. They can be used to fractionalize physical asset ownership.

A few assets like artwork, real estate, and expensive jewellery are tough to fractionalize today. A computerized replica of a structure is considerably easier to split among several owners than a physical one. The same is true for a valuable piece of jewellery or a unique case of wine.

Digitalization has the potential to significantly expand the market for particular assets, resulting in higher liquidity and price. Individually, it has the ability to improve the structure of financial portfolios, allowing for more diversification and more precise position sizing.

3. The Blockchain Technology Underpinning NFTs Is Extremely Secure.

NFTs are created utilizing blockchain technology, which is a technique for preserving information in a way that cannot be hacked, altered, or deleted. A blockchain is basically a digital record of transactions that is replicated and distributed among members in a peer-to-peer network.

All NFTs recorded on the blockchain have independent records of authenticity and chain-of-ownership, which prevents them from being mishandled or stolen. It is not possible to change or remove data that has been added to the chain. This implies that the scarcity and authenticity of each NFT are retained, creating a degree of confidence not seen in many marketplaces.

4. NFTs Can Add Diversification to an Investment Portfolio

NFTs are distinct from traditional assets such as stocks and bonds. As previously stated, they have different characteristics and provide benefits that we are only now beginning to fully appreciate. Having said that, ownership does not come without risk.

The risk will be discussed more in the next section. For the time being, simply be aware that the risk profile of NFTs differs from that of other asset types. As a result, adding NFTs to an investment portfolio may boost its efficiency. This essentially means having a greater risk-to-reward ratio.

Cons of NFTs

1. NFTs are volatile and illiquid

NFTs are still in their early stages, so the sector isn't very liquid. Besides NFTs are not well understood, and there are just a few potential buyers and sellers.  As a result, trading NFTs can be incredibly challenging, especially during bad times. It also means that NFT prices might vary greatly.

2. NFTs generate no revenue

Unlike stocks and bonds, or real estate, where owners get dividends, interest, and rent, NFTs do not give such revenue. The returns on NFT investments, like those on antiques and other collectibles, are based on price appreciation, which you can not count on.

3. NFTs Have the Potential to Perpetuate Fraud

While the trustworthiness of a blockchain cannot be questioned, NFTs can be utilized to commit fraud. Indeed, a number of artists have recently reported finding their work for sale as NFTs on online marketplaces without their permission.

This clearly contradicts the purpose of using NFT to facilitate the sale of paintings. The value proposition of an NFT is that it uses a unique token to verify a real work of art, assuring that the person who owns the token also owns the actual work of art.

A serious problem arises when someone creates an electronic image of the original work, attaches a token to it, and sells it on a virtual marketplace. There isn't even a reference to the original work. The token is associated with a forged replica.

4. NFTs Can Be Harmful to the Environment

Building blockchain records requires a significant amount of computer energy and there is growing concern about the long-term environmental impact of the process. According to some projections, if current trends continue, the carbon emissions related to mining cryptocurrencies and NFTs would exceed those associated with the whole city of London in the coming years. As NFTs transform global marketplaces, eliminating the need for travel and office space use, blockchain enthusiasts claim that an offsetting drop in pollution is happening.

How to Buy NFT

An NFT is a token created and controlled on a blockchain (most often Ethereum (CRYPTO: ETH)) that reflects asset ownership. As a result, most NFTs need payment in Ethereum or another cryptocurrency blockchain where they are built.

Here's a step-by-step guide on how to buy NFT

1. Buy Ethereum from a cryptocurrency exchange (such as Coinbase, Binance, Gemini, eToro, Crypto.com, Kucoin, Gate.io)
2. Transfer your crypto to a digital wallet. Consider it a digital checking account for crypto storage and transfer. Some exchanges, such as Coinbase, have built-in wallet capabilities when you create an account, while other choices include standalone wallets such as MetaMask, WalletConnect, CoinStats, Exodus, etc.
3. Connect your wallet to an NFT exchange. Once linked, you can begin browsing the NFT collection and make a purchase on the marketplace.

Bottom line

NFTs are a fascinating invention that is gaining traction as their applications expand. The eye-catching price tags attached to certain NFTs are fueling the fire. However, NFTs are very illiquid and volatile, smart investors should proceed with caution when considering purchasing these assets.

Purchasing them with the expectation of receiving three to four-fold returns is not a wise idea. The true significance of NFTs rests in their ability to change the way markets work and improve how we handle and regulate critical data. The sky is the limit here.

Nonetheless, if you want to be a part of the blockchain revolution and view NFT ownership as a viable option, go for it. Please, however, do it in a responsible manner. Don't invest a lot of money in NFTs and always go for low-cost positions. Otherwise, you may find yourself in a difficult situation, both financially and emotionally.